Taking advantage of the automatic credits function in QuickBooks allows you to save a tremendous amount of time inputting data. Now, let’s go through how to determine if this feature will be helpful for your business and how to use this setting.
What is a credit and how is it created?
A credit is a reduction in the amount a customer owes you. If a credit is applied and a customer doesn’t owe anything currently, their account will have a negative balance.
A credit can be entered into QuickBooks two different ways:
1. You issue a credit to your customer
This type of credit would be used to offer account credit for a customer return or if the customer was dissatisfied and you offered store credit as a gesture. To create this type of credit you:
1. Choose Create + Credit
2. Type in the customer’s name, the item they are returning or the reason credit is being issued
2. A customer pre-pays for an item or overpays
To create this type of credit:
1. Choose Create + Receive Payment
2. In instances where the amount you have received is more than the total due, the difference will show as an account credit
Set up your account to apply credits
Credits cannot be applied automatically unless you tell QuickBooks to begin doing this. To turn on automatic credits in QuickBooks click on Gear, followed by Company Settings, then Advanced, and finally Automatically Apply Credits.
An example of when and how to issue an automatic credit
Let’s say you performed work for a customer, Jennifer Han for $250. Your QuickBooks account shows that this invoice is open and has an unpaid balance of $250. You discover that Ms. Han is unhappy with the work you performed and you decide to credit her account by $100. You would need to take the following steps:
If the automatic setting function is turned on
If your automatic credits function is turned on you simply need to create a special payment transaction. Your QuickBooks account would then show that Ms. Han’s invoice is partially paid and has a remaining balance of $150. The credit memo status would read as “created by QB Online to link credits to charges.” This happens because when the setting is on:
• Any credit is automatically allocated to the next invoice issued to the customers account, as long as there are no older unpaid invoices.
• In circumstances where the issued credit is for more than the total of the oldest unpaid invoice, the remaining balance is then applied to the next oldest unpaid invoice.
• When a customer payment is received using the Receive Payment page it will not include a box for Credits, because the credits are automatically applied.
• The credit will show as Closed on the Sales and Customer transaction pages.
If the setting is turned off
If your automatic credits function is turned off in QuickBooks any credit you issue would be left unapplied so that you can apply it to a customer account when the next payment is made. Your invoice status would then be listed as Open, with an invoice balance of $250 and the credit memo status would read as Unapplied. This happens because when the setting is off:
• Any credit issued is not automatically applied to any unpaid invoices
• When you enter in a new customer payment under the page for Receive Payment you will see a Credits section that holds all customer credits. You will then be able to choose how and when to apply available credits.
• If you choose not to link any available credits, the Customer Balance Detail reports will show that the credit memo and invoice columns have open balances. These amounts will also show up as Open on the Sales and Customer transaction pages.
Should you turn the automatic credits function off or on?
The answer to this question depends greatly on your particular line of work and situation. But in general you will want to turn the function on if you wish to apply credits automatically to the oldest open invoices for one customer. And you will want to turn it off if you create a lot of credit memos and invoices for customers and need to apply credits very specifically. It is always wise to discuss your options with your accountant.
Final note
You can use sample data to try out the automatic credits in QuickBooks function to help you decide if this feature is right for your business or not.